As flexible as he wants to be

Corkins sees value in energy, media, financial services

By

JustinWiser

DENVER (CBS.MW) - A roller-coaster stock market, a weak economy and general difficulty for large companies are making it a challenge for David Corkins to find sure winners.

Corkins steered the Janus Growth & Income
JAGIX, +0.67%
to a 12.7 percent annualized return over the past three years, compared with a 3.7 percent gain for the S&P 500. The behemoth $8 billion portfolio -- which holds 60 to 80 stocks -- is down 21 percent this year, about a point behind the index.

"I'm working twice as hard just trying to look through the short-term volatility to find the names I want to own -- the names that two to three years from now will be higher than they are today," he said.

CBS.MarketWatch.com recently spoke with Corkins on his investing style and his assessment of the current market climate.

Janus has developed a strong reputation for its growth funds, yet growth and income funds are typically more value-oriented. Can you describe the kind of stocks you're looking for in this fund?

I don't particularly look for labels like growth or value. I'm pretty comfortable looking at all areas of the market. I am comfortable at times buying faster growing, more aggressive stocks and I'm also comfortable buying traditional, cyclical, heavy industry kind of stocks.

The way I typically construct my portfolio, two-thirds to three-quarters of it are in stable, consistent, growth-oriented franchises where I think the businesses are good and the managements are good -- these are stocks I look to own for quite some time. I've been running this fund for more than four years and many of the stocks that are in this category I've owned for the entire period.

What's a good example of this type of company?

Citigroup
C, -0.18%
is a good example. It's an excellent franchise, probably the closest thing to a global bank that there is. Sixty percent of its earnings are U.S.-based, 40 percent international, and they're close to 50-50 in terms of consumer and commercial earnings, so it's very well balanced. Financial institutions are one of the few institutions that are very scalable -- they can grow for quite a while before they hit natural market share or demographic limits. And the Citigroup management team is very talented. It's been a nice infusion of culture to have the Travelers DNA inserted into the Citicorp DNA, taking the strengths of both of those organizations.

Ultimately what I'm looking for in a stock is return on capital and free cash flow, and to see that number rising. Citigroup has close to $1 billion of free cash flow a month. A talented management team can usually find reinvestment opportunities for that in the business. With a lot of free cash flow, companies can also buy back their stock, which I believe Citigroup is doing now, invest in certain markets where competitors are pulling out, and buy weakened competitors as well, so when you come through the downturn this will be a stronger institution.

How do you factor what's going on with the economy into your stock picking?

I pay attention to anecdotal evidence -- mostly from talking to companies and lower-level employees and their suppliers. I feel like I get a better read from them than from listening to economists. If you find 10 smart economists, five will tell you things are going up and five will tell you things are going down, and they're all more intelligent than I am. So I'm just trying to talk to the companies and their lower-level employees and their competitors and figure out if their business is getting better or worse. If you talk to 50 different companies in 50 different industries, that's one of the best reads on the macro economy you can get.

Which areas look particularly attractive now?

Areas that I'm finding the most value in these days are energy, financials and media.

I recently raised my position in El Paso Corp.
EPG, -0.18%
when it had been beaten down. It's less commodity-sensitive than you might believe in terms of its earnings and the direction of natural gas or oil -- 85 percent of their earnings they've already locked in for next year. And it's becoming a less capital-intensive business. While I don't make too many price predictions, I do think natural gas will start to come back. While earnings aren't directly tied to that, sentiment on the stock is. It was selling at 10 times earnings and I think it's a mid-teens grower.

I purchased a block of that Disney
DIS, +1.43%
stock that was traded from the Bass brothers at $15 a share. Disney is certainly one of the best franchises out there. In the medium term, they're definitely being impacted by the economy, but you have to look at what that franchise is and the valuation you're getting it at and the free cash flow. That's a stock I don't expect to do well next quarter, but that was an attractive price. Three to five years down the road the stock will be higher.

Are you finding any values in technology?

I'm looking hard in the telecom and technology areas. I've seen some tremendous declines and I'm poking away at a couple of things, but nothing has really jumped out. We're still seeing economic weakness, and a lot of it is led by business cap-ex cuts. I'm not seeing many businesses in technology where things have stabilized and there's a clear path back. I'm also looking for consistency and stability, and with many technology franchises, it's hard to know what the technology's going to be doing in five or 10 years. Very few companies have broken through, like Microsoft
MSFT, +1.57%
to become the dominant player.

You said two-thirds of the portfolio was in leading growth companies -- what about the rest of the fund?

To manage volatility, I invest the other third or quarter of the fund in special situation or life-cycle change stories. Mattel
MAT, -0.64%
is an example of that. I bought Mattel after it blew up when it made the Learning Company acquisition. That's just a great franchise that made a very poor acquisition. The new manager, Bob Eckert, has done a nice job moving away from The Learning Company, paying down debt, cutting costs and just focusing on core franchise names like Barbie.

I also typically own convertible securities. These can be up to 15 percent of the fund. I moved out of those somewhat because they're priced now for hedge funds, who can buy these securities and short the underlying stocks, but in the last couple of years I've owned a great deal of those.

Because I don't make too many interest rate bets, the fixed income I do tend to own is from companies I'm analyzing where I think the bonds will do better than the equities. I don't make a big bet in 30-year bonds or 2-year bonds. I tend to own corporate bonds of the companies I know. Fixed income typically won't be more than 10 percent of the portfolio. The last way I get income is just through the dividends on the common stocks that I own.

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